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Enterprise & ownership

How new businesses actually get funded

Where the money really comes from at the start — and it is almost never venture capital.

A LevelEntrepreneurship / MBA — entrepreneurial finance
Also called: bootstrapping, angel investment, venture capital, start up loan

In one paragraph

The funding routes that get written about are the rarest ones. Most businesses start on the founder's own money and customer revenue.

Bootstrapping — savings, a day job, and money from customers. By far the most common route, and the most under-written because it makes a poor story. It is slow and it keeps every share and every decision.

Friends and family — cheap, fast and the most dangerous, because the relationship is the security. Whatever the arrangement, write it down and be explicit about the possibility of losing it all.

Debt — bank lending, and in the UK the government-backed Start Up Loan scheme for new businesses, which is a personal loan with mentoring attached. Debt keeps ownership and demands repayment regardless of trading.

Angel investment — individuals investing their own money, usually early, often with sector experience. In the UK, SEIS and EIS tax reliefs make this considerably more attractive to the investor, which is why they matter to the founder.

Venture capital — funds investing other people's money, seeking a large multiple within a fund's lifetime. It suits a very narrow band of businesses: large addressable market, fast growth, an exit. For everyone else it is the wrong instrument, not a prize you failed to win.

Grants and the rest

Innovation grants, local growth funds and competitions exist and are worth checking, but they take time to apply for and are rarely reliable enough to build a plan on.

The question is not 'how do I raise money'. It is 'what kind of business am I building' — because that decides which of these is even appropriate.

How to actually use it

  • Work out how much you actually need to reach the next proof point, not to feel comfortable. Raising more than that costs more ownership than it is worth.
  • Before taking equity, ask what the investor expects to happen in five years. If their answer is a sale and yours is a lifestyle business, stop there — that mismatch destroys companies.

Where it breaks down

  • Availability is heavily shaped by who you are and who you know. Access to angel networks is not evenly distributed, and pretending otherwise is unhelpful.
  • Scheme names and tax reliefs change. Confirm current rules before relying on them.

If you are being examined on it

Justify the source against the specific business: its age, its assets, its growth prospects and the owner's willingness to give up control.